National Australia Bank Falls as Costs Offset Record Profit

Shares in National Australia Bank Ltd. are on course for the biggest fall in four months after the lender’s expenses climbed even as it posted a record second-half cash profit on higher mortgage lending.

NAB’s cost-to-income ratio climbed 130 basis points to 42.6 percent in the year reflecting compensation paid to U.K. customers, a restructuring of its Australian businesses and costs related to a reduction in U.K. and Australian employees, the bank said.

Chief Executive Officer Cameron Clyne is paring the U.K. unit where mounting bad debts last year triggered NAB’s first profit drop since 2009. Australia’s largest lender by assets set aside A$165 million ($156 million) after tax in the year to Sept. 30 to meet possible compensation payouts to U.K. customers who were wrongly sold payment-protection insurance. “Costs were complicated,” Michael Wiblin, Sydney-based analyst at Macquarie Group Ltd. said in an e-mail. “Having said that, we expect that much of these additional costs this year will not reappear next year and in concert with lower impairment, NAB is set for sector leading earnings growth.”

NAB shares, which fell as much as 3.5 percent in early trading in Sydney, were 2.3 percent lower at A$35.40 at 11:38 a.m., trimming gains for the year to 42 percent. The benchmark S&P/ASX 200 index was little changed and has risen 17 percent this year.

Higher Dividend

NAB’s cash profit, which excludes one-time items, climbed to A$3.02 billion in the six months ended Sept. 30 from A$2.61 billion a year earlier, on higher mortgage lending and lower bad debt charges That met the A$3.01 billion median estimate of nine analysts surveyed by Bloomberg. Net income rose to A$2.93 billion from A$2.03 billion.

The bank boosted its final dividend to 97 Australian cents a share from 90 cents a share a year earlier. The median estimate of nine analysts surveyed by Bloomberg was for a dividend of 96 cents.

The lender is seeking a bigger share of Australia’s mortgage lending by offering a home-loan rate matched only by Australia & New Zealand Banking Group Ltd.

Mortgage Growth

NAB’s mortgage market share grew to 15.3 percent in August from 15 percent in September 2012, making it the third-largest home lender in Australia. Mortgage lending in the country climbed 4.7 percent in August from a year earlier, up from a record low of 4.4 percent in the 12 months to March, Reserve Bank of Australia data show.

“The pleasing result of the personal bank is a reflection of the consistent strategy for nearly five years now,” Clyne told reporters. It isn’t just interest rates “but a whole variety of things in terms of lower fees, rejuvenation in the distribution network that is being reflected in continued acquisition of customers.”

Demand for mortgages is increasing after the central bank dropped its benchmark interest rate by 225 basis points since late 2011 to a record 2.5 percent and banks cut mortgage rates to a four-year low.

NAB’s 7.2 percent increase in mortgage volumes in the year to Aug. 31 was the most among the big four Australian lenders, according to Australian Prudential Regulation Authority data.

Retail Banking

The bank’s cash profit in the year ended Sept. 30 rose to a record A$5.94 billion from A$5.43 billion a year earlier, NAB said. That was in line with the A$5.9 billion median estimate of analysts. Net income rose to A$5.45 billion in the year from A$4.08 billion.

NAB’s retail banking unit posted a 17.5 percent increase in cash profit in the year to A$1.23 billion while business banking cash profit expanded 3.3 percent to A$2.49 billion. NAB is the country’s largest business lender. It’s U.K. unit recorded cash profit of A$150 million, a turnaround from a A$213 million loss for the previous year. U.K. lenders have set aside 11 billion pounds ($17.6 billion) to cover the compensation payouts.

The bank moved 5.6 billion pounds of U.K. commercial real estate on to its own balance sheet a year ago and said in March that the remaining U.K. operations had become profitable. The value of the real-estate portfolio fell to 4 billion pounds at Sept. 30 from 4.4 billion pounds as at June 30, it said.

Job Cuts

NAB’s employee count fell 2.7 percent to 42,164 in September from a year earlier, the lender said. Australian banks are focusing on cost cuts to maintain profits.

The bank’s net-interest margin, a measure of lending profitability, dropped 9 basis points from a year earlier to 2.02 percent. Customer deposits climbed 8 percent, outpacing lending growth of 4 percent.

Charges for bad debts in the year fell to A$1.93 billion from A$2.62 billion, the bank said. Trading income increased 75 percent on year due to higher sales of risk management products to customers, NAB said.

NAB’s Tier 1 capital, a measure of its ability to absorb future losses under the local regulator’s Basel III guidelines, was 8.43 percent compared with 7.97 percent as of June 30.

The lender is the second of the country’s so-called four pillar banks, named after a law that prohibits merging with each other, to announce earnings. ANZ posted a 13 percent gain in second-half cash profit Oct. 29. Westpac Banking Corp. reports Nov. 4. Commonwealth Bank, the nation’s largest lender by market value, reports first-quarter earnings on Nov. 6.

Before it's here, it's on the Bloomberg Terminal.